Best Buy Boosts Quarterly Dividend 32%

March 9, 2018

Seeking Alpha

Best Buy Co., Inc. continued 15 years of consecutive annual dividend hikes by announcing a 32% boost to its upcoming quarterly dividend.

The company’s share price has been trending up with minimal volatility over the past 24 months and continued its uptrend after the market sell-off in late January and early February.

While analysts and investors have been predicting the demise of retailers amid the “retail ice age,” Best Buy continues to reward shareholders with double- and triple-digit percentage total returns.

Market conditions

Many companies in the retail sector have been suffering from direct competition of online companies, with Amazon (AMZN) the largest and most prominent threat.

Even retail giants such as Target (TGT), Kohl’s (KSS), Sears Holdings (SHLD), and Toys R Us seem unable to adjust their business strategies to the market shift and compete effectively. The situation seems so dire to some observers that they see the current period as a cataclysmic event, which only a few retailers will survive, and none will survive without significant changes to their business models.

Strategic Resource Group’s Managing Director Burt Flickinger, who is credited with creating the term “retail ice age,” discussed his outlook for retail in an interview with the Fox Business Network and indicated that the current supply of retail space exceeds the customer demand by 300%. He added that the oversupply will not be resolved before 2020.

Best Buy (NYSE:BBY) weathered retail headwinds a few years ago and has been beating the odds over the past 24 months, as well as rewarding its loyal investors with rising dividends and double-digit-percentage asset appreciation. However, some investors see Best Buy’s current positive trend as unsustainable and expect its share price – which is too high for the company’s short-term outlook – to crash when the company fails to meet its estimated outlook figures for 2018. Can Best Buy sustain its current level of performance over the long run and remain competitive or is this just a temporary boost that will end abruptly?

Best Buy Co., Inc.

Founded in 1966 as the Sound of Music, Inc. and headquartered in Richfield, Minnesota, the company changed its name to Best Buy Co., Inc. in 1983. The company operates as a retailer of technology products, services, and solutions in the United States, Canada, and Mexico through two business segments – Domestic and International. The company offers consumer electronics, computing devices and peripherals, mobile phones and accessories, entertainment systems and appliances. Additionally, the company provides consultation, design, delivery, installation, repair, technical support and educational services through its Geek Squad brand. The company currently offers its products through 1,200 large-format stores, 400 small-format stores and automated kiosks, as well as several websites. Some of Best Buy’s large-format stores contain areas that display high-end kitchen appliances and home theater equipment under the Pacific Kitchen and Home, and Magnolia Home Theater brand names.

Financial results

The company reported its best quarterly financial performance in years when it closed 2017 with holiday season results significantly above expectations. New tax regulations were the major cause of Best Buy’s net earnings drop from $607 million in the fourth quarter of 2016 to $364 million in the same quarter of 2017. However, after accounting for the one-time effects of the tax law, the adjusted earnings per share of $2.42 rose 25% over fourth-quarter 2016’s figures and outperformed the $2.02 analyst’s expectation by almost 20%.

The company reported a 13.4% total revenue increase in the U.S. market. This total revenue growth comprised a 9% comparable sales increase for the year and the net impact of additional revenue from the 53rd week of Best Buy’s fiscal calendar, as well as revenue lost from closing 18 stores. Additionally, comparable online sales grew at nearly twice the rate of overall sales and contributed significantly to Best Buy’s domestic revenue gains last year. At a nearly 18% increase over last year, the company’s domestic online revenue rose to $2.8 billion and now account for 20% of total revenue. This share of total revenue is 7.5% higher than the 18.6% figure from one year ago.

International revenue rose 20.3% versus last year to $1.38 billion. The comparable sales growth of nearly 10% accounted for nearly half of the annual growth rate. Approximately, 6% of positive foreign currency impact and approximately $45 million of additional revenue from the extra week in the fiscal year accounted for the remaining portion of revenue growth.


The company announced its next quarterly dividend payout of $0.45, which is 32.4% higher than its $0.34 distribution from the previous quarter. This new quarterly amount is equivalent to a $1.80 annual payout and currently yields 2.3%. The company will distribute the next dividend payout on its April 12, 2018, pay date to all its shareholders of record prior to the March 21, 2018, ex-dividend date.

The sharp share price rise over the past 12 months suppressed the current yield, which is presently 16% lower than the company’s 2.8% average yield over the past five years. However, calculated against the share price from one year ago, the company’s current annualized dividend would yield more than 4%. Nevertheless, even the current 2.3% yield outperforms the 2% simple average yield of the entire Services sector.

The company has been distributing dividends since 2003 and has boosted its annual dividend amount every year since then. Over that period, the company managed to average a 15.8% annual dividend growth rate and enhanced its total annual dividend amount nine-fold. The dividend growth rate accelerated over the past four years. Since 2014, the share price grew at an average rate of 25.7% per year and heightened Best Buy’s total annual dividend amount 150% from $0.72 to $1.80 over the past four years. In addition to the steady regular dividend growth, the company distributed three special dividends in the past seven years.

Share price

The company’s share entered the trailing 12 months riding the uptrend from the prior year and ascended more than 77% between its March 2017 low and the 52-week high of $78.06 on January 22, 2018. During the overall market sell-off in late January and early February, the share price pulled back almost 13% but recovered 57% of those losses and closed on March 6, 2018, at $73.61 – 5.7% short of the late-January peak. The $73.61 closing price was 71.2% higher than it was one year earlier, 67% above the 52-week low from March 2017 and more than 240% above its level from five years earlier.

The combination of robust asset appreciation and stable dividend income growth rewarded the company’s shareholders with a total return of nearly 80% over the past 12 months. Additionally, the shareholders received a 105% total return for the past three years and an extraordinary 343% total return over the past five years.

2018 outlook

The share price easily could fall if Best Buy’s financial forecasts are indeed too high and the company misses Wall Street’s expectations or if its e-commerce competitors manage to take away market share. However, the company’s fundamentals are solid. Best Buy announced that it will pull CDs from its stores. Additionally, the company plans to close 250 of its small-format stores, which account for only 1% of the company’s sales. Both initiatives are signs that Best Buy is trying to reduce and control its costs to positively affect the company’s earnings.

Additionally, the company’s current dividend payout ratio is 35%, which is an indication that – even if the share price growth slows – the company should be able to continue hiking its annual dividend payouts over the long term. Best Buy’s current price-to-earnings (P/E) ratio stands at 19 and its P/E ratio to industry is 56%. Additionally, the company’s Debt-to-Equity ratio of 32% is on par with the industry average.

Currently, institutional investors hold more than 70% of total shares, and that could be a potential issue. If these investors see potential red flags and start selling to avoid losses in the short term, that could trigger a massive sell-off and share price drop below its value based on fundamentals. Private investors with longer horizons might be more patient and willing to ride out minor volatility as a tradeoff for potentially higher total returns over the long run.